Chinese steel futures prices rebounded speculatively on Tuesday after Beijing hinted at a more robust reaction to the coronavirus. The dominant factor however remains uncertainty, and prices are likely to remain volatile until the uncertainty is resolved, Kallanish notes.

On the Shanghai Futures Exchange the May rebar contract closed at CNY 3,394/tonne ($486/t), CNY 89/t higher than Monday while the same contract for hot rolled coil closed up CNY 67/t at CNY 3,378/t. Sentiment has been bolstered by the visit of party secretary Xi Jinping to a hospital in Beijing. While the visit itself came rather late, it did signal to markets that policies would follow to handle the crisis and support the economy recovery.

Some analysts have been looking at the previous SARS outbreak to shape predictions for the coronavirus. Some things were similar, such as restrictions on movement and on workers gathering together. But there are more differences than similarities. Firstly, the Chinese economy looked very different then. China only produced 222 million tonnes of steel in 2003, compared to almost 1 billion tonnes in 2019. So, any similar percentage impact in China now will have bigger consequences. Secondly, SARS occurred when the Chinese economy was driven by economic reforms and not massive overinvestment. Steel production and demand over the whole year actually continued growing very significantly therefore (crude steel output was up 22% in 2003). Thirdly, China was then a net importer of steel, whereas now it is a net exporter. That means any shortfall in domestic demand could mean more aggressive exports.

In terms of what we know so far for coronavirus, demand is definitely going to take a very big hit in the first quarter. In the best-case scenario, construction activity will essentially lose a month of activity, and most manufacturing will be likewise affected. Steel production will also be lower, especially for EAFs which are almost all not operating. The balance in the short term will be towards oversupply and inventories are already at their highest in several years, despite having been very low at the start of the year. 

On the other hand, China held back from serious stimulus last year. If support is given to developers then the outlook for steel demand in the second half could be better than previously expected. It really is too early to tell therefore what the net impact will be. The only thing that is guaranteed is that prices will be very volatile in the next few weeks. Q1 will also mean weaker demand, with Chinese steelmakers booking losses, and the pressure to export will increase.